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Wednesday, 2 August 2017

Tech: Coinbase got hammered for rejecting Bitcoin Cash, but the startup is betting the move will pay off

The digital currency startup saw an exodus of users this week after announcing that it wouldn&#039;t support bitcoin cash.

*Digital currency startup Coinbase saw an exodus of users this week after announcing that it wouldn't support bitcoin cash.

*Bitcoin cash is a brand new digital currency, established on Tuesday, through a "hard fork."

*A hard fork is when a digital currency splits into two separate currencies. In this case, the original bitcoin split into bitcoin cash as a means of dealing with disagreements in the community over how the technology behind the currency should run.

The world of cryptocurrency is not exactly a calm place. And for Coinbase, one of the hottest and most valuable startups in the sector, this week's remarkable "bitcoin hard fork" put the company in the center of a raging storm.

Many users of Coinbase, which operates a platform for buying and selling cryptocurrencies like bitcoin, unleashed their wrath on Coinbase, accusing it of everything from being a tool for the NSA to being scammers. Some threatened to sue.

Bitcoin's big offense was its decision not to support Bitcoin Cash — the new form of cryptocurrency that was spun out of bitcoin. The angry reaction, and the risk of a big loss of customers, raised questions about the future of what has been one of the crypto world's biggest success stories.

For now though, Coinbase's backers aren't sweating it. And they don't anticipate the drama having much of an effect on the startup, which has been in process of raising funding on terms that would value it at roughly $1 billion.

"There's no one on the board or any investor who doesn't completely back the point of view that we should err on the side of safety and trust," said Barry Schuler, a partner with DFJ, an investor in Coinbase.

"From an investor's point of view, we invested in Coinbase because they have made a voluntary commitment to be regulated," Schuler said, "and to focus on being trusted and safe — as safe as you can be in an experimental environment like this."

Though Coinbase didn't participate in Tuesday's currency launch, Schuler said that Coinbase could change its policy as early as next week, depending on how bitcoin cash matures.

Another Coinbase investor, Fueled founder Rameet Chawla, even suggested that Coinbase might increase the strength of the original bitcoin down the line by establishing faith in the legacy currency.

That's because Coinbase's conservative approach make cryptocurrency more accessible to ordinary folks who might be afraid to dabble in technologically complex digital currencies.

"They're a huge net positive on bitcoin, making it really easy on people who are not early adopters," Chawla said.

Exodus

With 9 million users and $20 billion exchanged, Coinbase has its hands on a lot of the digital currency floating around. And while investors support Coinbase's decision to sit out the initial fork, many customers felt betrayed by the company.

A scan of the Coinbase community forums shows a host of angry topics such as "What if Coinbase is NSA tool to destroy BTC (bitcoin cash)?" and "Dear Coinbase, if you not release my funds in 1h I am going to sue you."

Coinbase wouldn't disclose how many users withdrew their bitcoin in anticipation of the hard fork. But optically things looked rough. Coinbase users experienced delays of around 12 hours on withdrawals over the weekend due to the number of people moving their bitcoin.

Despite this, sources close to the situation said that the users who left the exchange are likely only gone temporarily and expect to see many people return to Coinbase while simultaneously storing newly acquired bitcoin cash in a different digital wallet.

"Ultimately, Coinbase is an exchange for buying bitcoin, but people are free to use their own wallets and take control of their wallets anyway they want," Chawla said.

But wait, what's a hard fork?

Outside of Coinbase — both in privately held digital wallets and in bitcoin — wallets were duplicated on Tuesday as part of the "hard fork," which created a cloned but separate currency which follows different technological protocols from the original bitcoin. The fork was a means of dealing with disagreements in the bitcoin community over how to evolve the technology to handle increased demand.

The hard fork followed a process similar to cell division in biology, in that both currencies were exactly the same at the point of division, but will pursue different paths moving forward.

Users storing their bitcoin in a digital wallet that accepts bitcoin cash found themselves with as many bitcoin cash coins on Tuesday as they had in bitcoin at the point of the duplication. Though, it's worth noting that bitcoin and bitcoin cash do not have the same currency value, so duplication is not the same as a doubling in worth.

Why Coinbase sat out bitcoin cash

In a statement on Twitter Tuesday, Coinbase CEO Brian Armstrong wrote that the company is agnostic to which currencies its users trade, and that it's not opposed to adding new assets in the future.

"Our goal is to be the safest, most trusted and compliant, and easiest to use. Not the first to market with new assets," Armstrong wrote. "Especially at scale, it takes time to ensure any new asset we add is well tested and secure."

Generally speaking, Coinbase isn't quick to take on new currencies. Founded in 2012, the exchange still only trades bitcoin, ethereum, and litcoin — all digital currencies which the team has deemed stable enough for an amateur investor to put money into, but also technically secure.

We have made this decision because it is hard to predict how long the alternative version of bitcoin will survive and if Bitcoin Cash will have future market value

So it was of little surprise to those close to the company when it issued a statement on July 27 advising that customers who want to access both the original bitcoin and bitcoin cash would need to withdrawal from Coinbase by July 31.

"We have no plans to support the Bitcoin Cash fork. We have made this decision because it is hard to predict how long the alternative version of bitcoin will survive and if Bitcoin Cash will have future market value," David Farmer, director of business development , wrote.

Users were irked because Coinbase's decision to not accept bitcoin cash meant that anyone with bitcoin stored in Coinbase's digital wallet would lose out on what many saw as free bitcoin cash.

Others were concerned that Coinbase would secretly keep the bitcoin cash that was generated on Tuesday. However, in a statement last Friday, the company denied that this would happen.

“Coinbase would not keep the bitcoin cash associate with customer bitcoin balances for ourselves,” the company posted on Twitter.

Investors like Schuler, however, saw the Coinbase's trepidation as part of its core business strategy.

"The whole cryptocurrency-blockchain space is a bit like the wild west right now — just like the beginning of the internet," Schuler said. "But slowly and surely, it's becoming institutionalized. Coinbase represents that — being legitimate and offering as much trust and safety as possible."